A war does not finance it self, it is your money that pays for it!

A war does not finance it self, it is your money that pays for it!

The US government paid for the World War I with raised taxes and liberty bonds.

The war started and all of its bills were flooding in but where did the money that paid for the war come from? There were two things the government could do. First, raise the taxes and secondly, borrow from the public.

Economists at that time thought that raising the taxes was the best choice. They were following traditions that stretched back to Adam Smith time, around 1776, who thought that raising taxes was the most logical thing to do in order to convey the actual cost of the war to the public. Oliver Morton Sprague, who was one of the leading economists at that time, argued against borrowing money from the public; he thought that it was wrong for young men to join the army and then, when they got back home again, pay higher taxes in order to fund the principal and interest of the so called war bonds.

William Gibbs McAdoo who was the Treasury secretary at that time thought that there needed to be a balance between war bonds and higher taxes, so his idea was, very logical, to split them: 50% each, If it was more from higher taxes; the wealthier classes would be angry and withdraw their support.

The change of the taxes happened in October 1917 under the “War Revenue Act”. The act increased the federal income tax and at the same time lowered the exemption. For example: If you earned an income of $20,000 dollars before the act, the tax rate were 2%. That tax on the exact same amount of money rose to 7%. If you had an income of $2,000,000 dollars the rate went from 15 % up to 67 %. As you can see in the graph [1], the percentage income share raises from around 1917 due to the “War Revenue Act” and then remained high until the World War II ended in 1945 were the taxes became normal because there were not need for war materials. The taxes rose a lot but the high taxes still did not cover the cost of the war

The short-term borrowing from the public was undertaken as a stopgap. It was necessary to issue long term borrowing, in order to reduce the pressure on the economy and the danger of a higher short term interest rate so the Treasury created Liberty Bonds. The first solution was a thirty year bond bearing a 3.5 percent coupon callable after fifteen years. This worked; all the selling of these coupons raised over $20 billion dollars to fund the war. The success of these liberty bonds were the campaigns launched nation wide by McAndoo; rallies were held by famous actors, such as Charlie Chaplin, who encourage the people to buy Liberty Bonds.

The actual cost of the war was calculated by John Maurice Clark who estimated the cost to be around $22,625,253,000 dollars and all of this money came from your pocket.